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Making Sense of Retail's Q3 Results

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The Retail sector’s Q3 results reconfirm the struggles of traditional brick-and-mortar operators with falling foot traffic as a result of sales shifting to the online medium. That said, the list of winners and losers this earnings season offers a mixed picture, in practically every Retail category.

The market liked Target’s (TGT) results, but wasn’t happy with Wal-Mart’s (WMT), Home Depot (HD - Free Report) did fine but Lowe’s (LOW) disappointed, and Gap (GPS) dropped the ball while The Children Place (PLCE) came out shining. The department store results were broadly well received. But as discussed in this space earlier, the department store outperformance was largely a function of cost controls and inventory management.

It is tough to be a traditional retailer in this environment of shifting consumer preferences. The one positive factor for the space is the favorable consumer spending outlook, a beneficiary of the steadily improving labor market and signs of wages gains. This favorable macro spending backdrop should help the Retail space in the coming quarters, particularly the all-important holiday shopping season. But it isn’t a case of the rising tide lifting all boats, with the winners and losers dependent on execution and management effectiveness.

Retail Sector Scorecard

As of Friday November 18th, we have seen Q3 results from 36 retailers in the S&P 500 index (out of the 43 total) that combined account for 94% of the sector’s total market cap in the index. Total earnings for these 36 retails are up +7.4% from the same period last year, on +4.9% higher revenues, with a relatively low 61.1% beating EPS estimates and a very low 44.4% coming ahead of top-line expectations. The proportion of retailers that have beaten Q3 EPS and revenue estimates is the second lowest of all 16 Zacks sectors, behind only Construction.

The side-by-side charts below compare the growth rates and beat ratios thus far with what we have seen from the same group of 36 retailers in other recent periods.

As you can see, the group’s Q3 earnings growth compares favorably with historical periods, though top-line growth is tracking below the 4- and 12-quarter averages. Positive surprises are notably hard to come by in Q3, both for earnings as well as revenues. The proportion of Retail sector companies beating EPS estimates is the second lowest of all 16 sectors in the index, with the sector the 6th lowest with respect to revenue surprises.

Q3 Earnings Scorecard (as of 11/18/2016)

We now have Q3 results from 476 S&P 500 members or 95.2% of the index’s total membership. Total earnings for these 476 companies are up +4.0% from the same period last year on +2.6% higher revenues, with 73.1% beating EPS estimates and 55.5% coming ahead of revenue estimates.

The table below shows the scorecard of these 476 index members. We have reached the final phase of the reporting cycle, with only 13 S&P 500 members reporting results this week.

Any way you look at it, this is better performance than we have seen from the same group of 476 index members in other recent periods, as the comparison charts below show.

The aggregate growth picture improves even further once the Energy sector’s drag is removed. Excluding the Energy sector, total earnings for the rest index members that have reported are up +7.4% on +4.3% higher revenues. The comparison charts below show the aggregated reported picture with and without the Energy sector.

In the comparison chart below, we are comparing the proportion of S&P 500 members that are beating both EPS and revenue estimates in Q3 with historical periods. As you can see, Q3 is tracking above other recent periods largely on account of more numerous revenue beats.

Q3 Expectations As a Whole

Combining the actual results from the 476 S&P 500 members with estimates from the still-to-come 24 index members, total Q3 earnings are now expected to be up +3.6% from the same period last year on +1.5% higher revenues. The +3.6% earnings growth in Q3 is the first positive growth for the index after 5 quarters of back-to-back declines.

The Q3 earnings growth may not be much, but it is nevertheless a notable improvement over what we saw in the preceding 5 quarters, as the chart below shows.

Positive growth was expected to show up in the last quarter of the year, with pre-season expectations putting Q3 growth in negative territory. In other words, not only has the earnings recession finally come to an end, but positive growth has arrived ahead of schedule. In a way, Q3 can be seen as an inflection point.

Expectations Beyond Q3

The chart below shows current bottom-up consensus earnings expectations for the index in 2016 Q3 and the following four quarters contrasted with actual results in the preceding four quarters. Please note that the columns represent bottom-up earnings totals for each quarter in billions of dollars while the line represents the quarterly growth rates.

The Energy sector drag is expected to end in 2016 Q4 and beyond, as the chart below of the sector’s earnings shows.

The improved Energy sector outlook makes sense, given shifting comparisons and the improvement in oil prices. But we will have to wait to find out if estimates for the other sectors will hold up as companies report Q3 results and provide guidance for Q4 and beyond.

It will be interesting to see if the decelerated pace of negative revisions that we saw the last earnings season will get repeated this time as well.

Note: Sheraz Mian regularly provides earnings analysis on and appears frequently in the print and electronic media. In addition to this Earnings Preview article, he publishes the Zacks Earnings Trends report every week.

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Here is a list of the 71 companies including the 13 S&P 500 members that are reporting next week. 

Company Ticker Current Qtr Year-Ago Qtr Last EPS Surprise % Report Day Time
TYSON FOODS ATSN1.240.8313.08%MondayBTO
INTL GAME NEWIGT0.440.460.00%MondayBTO
YY INC-ADRYYN/A0.4326.76%MondayBTO
CUBIC CORPCUB0.21.05-73.44%MondayBTO
COPART INCCPRT0.550.429.26%MondayAMC
SINA CORPSINA0.190.15700.00%MondayAMC
JACK IN THE BOXJACK0.880.6222.99%MondayAMC
DYCOM INDSDY1.651.245.13%MondayAMC
PALO ALTO NETWKPANW-0.27-0.36-112.50%MondayAMC
STAR BULK CARRSSBLK-0.65-0.552.67%MondayAMC
CORIUM INTRNTNLCORI-0.39-0.4219.05%MondayAMC
ENANTA PHARMAENTA-0.110.2953.85%MondayAMC
ANALOG DEVICESADI0.891.037.89%TuesdayBTO
DOLLAR TREE INCDLTR0.780.49-1.37%TuesdayBTO
CAMPBELL SOUPCPB0.950.95-8.00%TuesdayBTO
PATTERSON COSPDCO0.610.560.00%TuesdayBTO
HORMEL FOODS CPHRL0.460.375.88%TuesdayBTO
JACOBS ENGIN GRJEC0.770.85.41%TuesdayBTO
SIGNET JEWELERSSIG0.190.33-22.45%TuesdayBTO
EVINE LIVE INCEVLV-0.04-0.0950.00%TuesdayBTO
INNOCOLL HLDGSINNL-0.48-0.6214.52%TuesdayBTO
NAVIOS MARI HLDNM-0.25-0.230.00%TuesdayBTO
CHICOS FAS INCCHS0.130.1313.64%TuesdayBTO
DSW INC CL-ADSW0.490.5120.69%TuesdayBTO
EATON VANCEEV0.610.530.00%TuesdayBTO
KIRKLANDS INCKIRK-0.1-0.04-4.76%TuesdayBTO
SEADRILL LTDSDRL0.20.2143.90%TuesdayBTO
GOLDEN OCEAN GPGOGL-0.32-0.98.57%TuesdayBTO
MOVADO GRP INCMOV0.710.92-12.90%TuesdayBTO
AMER WOODMARKAMWD1.211.134.04%TuesdayBTO
BARNES & NOBLEBKS-0.27-0.2822.22%TuesdayBTO
BIOLINE RX LTDBLRX-0.07-0.030.00%TuesdayBTO
DAKTRONICS INCDAKT0.10.07160.00%TuesdayBTO
HANWHA Q CELLSHQCL0.210.2591.67%TuesdayBTO
NORTH ATL DRILGNADL-0.99-0.1453.33%TuesdayBTO
QIWI PLC-ADRQIWI0.270.2717.86%TuesdayBTO
TECH DATA CORPTECD1.271.28-1.39%TuesdayBTO
SEADRILL PTNRSSDLP0.530.9827.42%TuesdayBTO
HEWLETT PKD ENTHPE0.610.558.89%TuesdayAMC
HP INCHPQ0.360.936.67%TuesdayAMC
VEEVA SYSTEMS-AVEEV0.10.0812.50%TuesdayAMC
MENTOR GRAPHICSMENT0.310.12200.00%TuesdayAMC
QAD INC-AQADA-0.010.17160.00%TuesdayAMC
NIMBLE STORAGENMBL-0.48-0.364.08%TuesdayAMC
CALERES INCCAL0.810.8-9.80%TuesdayAMC
GAMESTOP CORPGME0.470.543.85%TuesdayAMC
DEERE & CODE0.361.0863.16%WednesdayBTO
TRINA SOLAR LTDTSL0.160.2123.53%WednesdayBTO
ISRAEL CHEM LTDICL0.090.1266.67%WednesdayBTO
SOC QUIMICA MINSQM0.310.1823.08%WednesdayAMC

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